Media Kit: Dealing with Debt

Countries have been able to effectively raise their level of investment through
borrowing - but in the process, some have become overwhelmed by debt, crippling their
capacity to meet the needs of their citizens and to sustain economic growth. The
International Conference on Financing for Development can help build consensus on the
means to finally eliminate debt traps, and to build the political will to do so.

Large-scale indebtedness of developing countries to foreign lenders first became a
widespread problem in the early 1980s. High debt levels escalated into balance-of-payments
crises, as rising interest rates forced repayment amounts upward. Meanwhile, oil price
shocks and economic recession in industrial countries that were export markets crippled
the ability of indebted developing countries to make payments.

Meanwhile, the poorest countries, especially the 49 "LDCs" - or "least
developed countries" -borrowed increasingly large amounts, mainly from governments
and international financial institutions. In 1976, only two out of 28 LDCs for which data
are available had ratios of external debt to gross domestic product (GDP) of over 50
percent, and also had ratios of external debt to total exports higher than 200 percent.
But by 1987 two thirds of the LDCs had passed these thresholds. That year, 19 LDCs -
mostly from Africa - went to the Paris Club of developed country creditors to reschedule
their debts.

By the early 1990s, the "Brady Plan" reduced the excessive bank debt of most
middle-income countries in crisis, but the debt problem continued to linger, and to
intensify in low-income countries. In 1998, for example, Mozambique's debt-to-GDP ratio
had reached 210.8 percent, Laos was at 93.3 percent and in Sudan the ratio was 162.5
percent.

In 1998, total debt payments made by all LDCs amounted to $4.4 billion, constituting
roughly 12 percent of their total exports. Even this substantial amount, however,
reflected only payments made, not payments due. In that same year, arrears constituted
30.4 percent of the total debt stock.

By the end of the 1990s, it was clear that not only the low-income countries but also
middle-income heavily indebted countries had not escaped the debt trap. First in Mexico,
then in East Asia, later in the Russian Federation, followed by Ecuador, Ukraine and
Pakistan, and finally in Turkey and Argentina, countries were still vulnerable to
debt-related payments crises. Moreover, as such countries drew less on international bank
finance and increasingly on international bond issues, there were no broadly agreed
mechanisms for restructuring debt-servicing obligations after a crisis erupted.

The importance of financial and technical support, including debt relief, to both
middle and low-income highly indebted developing countries has been under discussion in
preparations for the International Conference on Financing for Development (FfD), to take
place in Monterrey, Mexico in March 2002. Participants in the process have called for
greater flexibility in policy actions from multilateral institutions such as the
International Monetary Fund (IMF) and the World Bank, and for prompt debt relief for LDCs,
small-island and landlocked countries and other poor nations that have been struck by
natural disaster, suffered severe terms-of-trade shocks, or are emerging from conflict.

Policy issues regarding debt of middle-income countries are discussed in the
backgrounder in this kit on "systemic reform". The special concerns of
low-income countries are highlighted below.

Heavily Indebted Poor Countries Initiative Governments in the FfD preparatory process
have called for speedy and full implementation of the Heavily Indebted Poor Countries
(HIPC) Initiative, which is the main international debt relief programme for a group of
the poorest and most indebted countries in the world. Launched by the Bank and the Fund in
1996, it responded to public pressure mounted by a coalition of non-governmental
organizations led by Jubilee 2000. Many NGOs continue to press for a full resolution to
the debt crises of the HIPCs and other countries.

Unlike earlier debt relief mechanisms, the HIPC Initiative took into account the need
for deep cuts in total debt including, for the first time, relief from debt owed to the
IMF, World Bank and other multilateral institutions. Even so, it was not enough. The
Initiative was enhanced in 1999 to provide "broader, deeper, and faster" relief,
while linking debt relief more directly to support for poverty reduction measures. Of 42
countries eligible for the HIPC Initiative, 24 have passed a key benchmark in the process,
called the "decision point". Over time, they are expected to receive about $36
billion in debt service relief.

The enhanced HIPC Initiative will cut in half the outstanding debt stock of these
countries, and slash debt-service payments by roughly one-third. Nevertheless, even this
advance is threatened, as prices for commodities usually exported by poor countries
continue to fall and international trade suffers from the current economic slowdown.

One point that has been made in preparation for the International Conference on
Financing for Development is that the ability of each country to repay loans should be
assessed in terms of its capacity to finance programmes to reach the Millennium
Development Goals, and that debt repayment should not detract from their achievement. (The
Millennium Development Goals, including a pledge to cut extreme poverty worldwide in half
by 2015, were adopted by 147 Heads of State and Government and by 191 nations overall at
the Millennium Summit meeting held at the United Nations in September 2000.)

Representatives of the developing countries have also urged that accelerated relief for
highly indebted poor countries should not lessen the aid received or raise the interest
rates paid by other developing countries. So as not to divert resources from financing for
development, they maintain, debt relief needs to be complemented by increased official
development assistance, mainly in the form of grants and highly concessional loans.